📈 economics

Internal Audit Competency, Internal Audit Independence, and Decision-Making Effectiveness: The Mediating Role of Financial Reporting Quality in Somali Private Banks

This study of 92 employees in Somali private banks demonstrates that internal audit competency and independence enhance decision-making effectiveness by improving financial reporting quality, which acts as a significant mediating mechanism.

Original authors: Abdulkadir Said Ahmed

Published 2026-07-10

📖 4 min read☕ Coffee break read

CC BY 4.0

Original authors: Abdulkadir Said Ahmed

Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). ✨ This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer

Imagine the banking world in Mogadishu, Somalia, as a massive, bustling kitchen where the chefs (bank managers) are trying to cook up the perfect financial feast for their customers. But here's the problem: the chefs can't taste the food if the recipe cards (financial reports) are scribbled in crayon, smudged with grease, or written by someone who forgot how to read. If the recipe is bad, the chefs might accidentally serve a dish that's too salty, too expensive, or even dangerous.

This study, led by Abdulkadir Said Ahmed, acts like a detective trying to figure out how to get those recipe cards perfect. The detective focused on two special helpers in the kitchen: the Internal Audit Competency (how skilled the recipe-checkers are) and the Internal Audit Independence (whether the recipe-checkers are afraid of the head chef or free to speak the truth).

The Big Discovery: The "Recipe" Connection

The study didn't just guess; it asked 92 real kitchen workers (employees from 6 private banks) to fill out surveys. Using a powerful computer tool called SmartPLS 4, the researchers found something very clear:

Skill Matters: When the recipe-checkers are highly skilled (high competency), the recipe cards become much clearer and more accurate. The data showed a strong link here, with a score of 0.536 (a big number in this world) and a confidence level so high the chance of it being a fluke is less than 0.001.
Freedom Matters: When the recipe-checkers are allowed to work without the head chef breathing down their necks (high independence), the recipe cards also get better. This link was also strong, scoring 0.348 with the same super-high confidence (p < 0.001).

The Secret Middleman

Here is the most interesting twist. The study found that the skilled and independent checkers don't magically make the chefs cook better directly. Instead, they do it through a secret middleman: Financial Reporting Quality.

Think of it like this: The skilled checkers fix the recipe cards first. Once the recipe cards are perfect, then the chefs can make better decisions about what to cook, how much to charge, and how to run the kitchen. The study suggests that the path from "skilled checkers" to "better decisions" runs entirely through "better recipe cards."

The numbers back this up:

The path from Skilled Checkers → Better Recipes → Better Decisions had a score of 0.452.
The path from Free Checkers → Better Recipes → Better Decisions had a score of 0.293.

Both paths were statistically significant, meaning the researchers are very sure this connection exists. In fact, the study found that the skill and freedom of the checkers explained 69.2% of why the recipe cards were good, and those good recipe cards explained 71.0% of why the chefs were making great decisions.

What the Study Doesn't Say

It's important to know what this study didn't find. The researchers did not find a direct magic line where skilled checkers instantly make chefs smarter without the recipe cards getting better first. They didn't estimate a direct path from the checkers to the decisions. The paper suggests that the improvement in decision-making happens because the financial reports are high quality, not just because the checkers are there.

Also, the study admits it has some limits. Because they asked people for their opinions at just one moment in time (a snapshot), they can't say for 100% certain that one thing caused the other. It's possible that banks that already make great decisions are the ones who hire skilled checkers. The authors suggest that future studies should watch these banks over a longer time to be absolutely sure about the cause-and-effect.

The Takeaway for the Kitchen

So, what does this mean for the banks in Mogadishu? The study suggests that if you want your bank managers to make better choices, you can't just tell them to "decide better." You have to:

Train your checkers: Make sure they have the right skills and training.
Protect your checkers: Make sure they can speak up without fear.

When you do these two things, the financial reports get better. And when the reports are better, the managers can finally see the whole picture and make the right moves. It's a chain reaction: Skill + Freedom → Clear Reports → Smart Decisions.

Technical Summary: Internal Audit Competency, Independence, and Decision-Making Effectiveness in Somali Private Banks

Problem Statement
The study addresses the critical need for accurate, timely, and reliable financial data within the private banking sector of Somalia, a post-conflict environment characterized by evolving regulatory frameworks and a predominantly informal economy. In such unstable jurisdictions, external regulatory oversight often faces capacity constraints, placing the burden of risk mitigation and information integrity on internal governance mechanisms. The research investigates how specific attributes of the internal audit (IA) function—namely Internal Audit Competency and Internal Audit Independence—influence Decision-Making Effectiveness. Crucially, the study posits that these relationships are not direct but are mediated by Financial Reporting Quality (FRQ). The core problem is determining whether strengthening internal audit attributes translates into better managerial decisions in Somali banks, and if so, whether this occurs through the mechanism of improved financial reporting.

Methodology

Research Design: A quantitative approach utilizing Partial Least Squares Structural Equation Modeling (PLS-SEM).
Population and Sampling: The study targeted employees in finance, accounting, auditing, risk management, and managerial departments across private banks in Mogadishu, Somalia. From 13 licensed banks, six agreed to participate. A stratified sampling technique was employed, resulting in 120 distributed questionnaires and 92 usable responses (response rate ~77%).
Data Collection: Data were gathered via a five-point Likert scale questionnaire distributed through Google Forms. The instrument was validated by 18 experts (academics, professionals, economists) to ensure content validity and contextual relevance.
Analytical Tools: Data were analyzed using SmartPLS 4. The analysis included:
- Measurement Model Assessment: Evaluation of composite reliability (CR), average variance extracted (AVE), and discriminant validity (using Fornell-Larcker criterion and cross-loadings).
- Structural Model Assessment: Assessment of path coefficients, bootstrapping for significance testing (5,000 subsamples), and the coefficient of determination ( $R^2$ ).
Theoretical Framework: The study integrates Agency Theory (focusing on monitoring mechanisms to reduce information asymmetry) and the Resource-Based View (RBV) (viewing auditor skills and experience as valuable organizational resources).

Key Findings
The structural model analysis yielded the following statistically significant results:

Internal Audit Competency and Financial Reporting Quality: A strong positive association was found ( $\beta = 0.536$ , $t = 7.545$ , $p < 0.001$ ). Higher levels of auditor technical expertise and professional qualifications are linked to superior financial reporting quality.
Internal Audit Independence and Financial Reporting Quality: A significant positive association was observed ( $\beta = 0.348$ , $t = 4.108$ , $p < 0.001$ ). Structural autonomy and freedom from managerial interference correlate with more reliable financial reporting.
Mediating Role of Financial Reporting Quality: The study found that Financial Reporting Quality acts as a significant mediator.
- Indirect Effect (Competency $\to$ FRQ $\to$ Decision-Making): $\beta = 0.452$ ( $p < 0.001$ ).
- Indirect Effect (Independence $\to$ FRQ $\to$ Decision-Making): $\beta = 0.293$ ( $p < 0.001$ ).
- Note: The study did not estimate direct paths from Internal Audit attributes to Decision-Making Effectiveness; thus, the findings are interpreted as evidence of significant indirect mediation rather than full or partial mediation.
Explanatory Power:
- Internal Audit Competency and Independence jointly explained 69.2% of the variance in Financial Reporting Quality ( $R^2 = 0.692$ ).
- Financial Reporting Quality explained 71.0% of the variance in Decision-Making Effectiveness ( $R^2 = 0.710$ ).

Key Contributions

Contextual Empirical Evidence: The study provides rare empirical data on internal audit dynamics within the Somali banking sector, a developing and fragile institutional environment often underrepresented in global governance literature.
Mechanism Elucidation: It moves beyond examining internal audit and decision-making as isolated variables, explicitly testing and confirming the mediating mechanism of Financial Reporting Quality. This clarifies how internal audit attributes influence managerial outcomes: by first ensuring the integrity of the financial information pipeline.
Theoretical Integration: The research successfully applies both Agency Theory and RBV to explain the interplay between governance monitoring and organizational capabilities in a post-conflict setting.

Significance and Limitations (As Claimed by the Paper)
The paper claims that its findings suggest a clear pathway for improving governance in Somali private banks: strengthening internal audit competency and independence leads to better financial reporting, which in turn enhances the effectiveness of managerial decision-making. The authors recommend that banks prioritize professional training and reinforce reporting structures to ensure audit independence.

However, the authors maintain a modest stance regarding the study's scope and causal claims:

Causality: Due to the cross-sectional, single-source nature of the data, definitive causal relationships cannot be established. The authors acknowledge the possibility of reverse causality (e.g., banks with better decision-making systems may invest more in audit functions).
Methodological Constraints: The study relies on perceptual self-reports rather than objective indicators (e.g., audited financial statements or regulatory enforcement records). The authors note the absence of full collinearity assessment (inner VIF), effect size ( $f^2$ ), predictive relevance ( $Q^2$ ), and out-of-sample predictive assessment (PLSpredict) in the current analysis.
Future Directions: The paper explicitly calls for future research to utilize longitudinal designs, multi-source data, and objective indicators to strengthen causal inference and explore additional institutional factors affecting financial reporting in Somalia.

The Big Discovery: The "Recipe" Connection

The Secret Middleman

What the Study Doesn't Say

The Takeaway for the Kitchen

Technical Summary: Internal Audit Competency, Independence, and Decision-Making Effectiveness in Somali Private Banks

More like this